In addition to your personal income tax liability, if your contracting salary is above the prevailing thresholds, both you and your company (limited or umbrella) will need to pay National Insurance Contributions to HMRC.
[See this Spring Statement 2022 update – the National Insurance threshold for employees will rise to £12,570 during the 2022/23 tax year. We have updated this article to reflect this.]
The National Insurance system was originally put in place to protect workers during times of sickness and unemployment.
In recent years, National Insurance Contributions have raised an increasing proportion of total UK Treasury receipts, and the system is seen by many as an additional income tax in all but name.
All UK employers must pay Employers’ NICs on salaries paid to their employees, and the employees themselves must pay Employees’ NICs on any income they earn.
Here, we look at how NICs are calculated, for both employers and employees.
This article has been updated for the 2022/23 tax year.
National Insurance for Employees
If you’re a contractor, you will be an employee of your own limited company, an employee of an umbrella company employer, or in some cases, a PAYE employee of an employment agency.
As an employee, you must pay Class 1 Employees’ NICs on salary above the current Primary Threshold.
Unusually, the Primary Threshold changes during the 2022/23 tax year.
- From April 6th, 2022 to July 5th, 2022, Employees’ NIC is payable on salaries over £9,880 per year.
- From July 6th, 2022 onwards, Employees’ NIC is payable on salaries over £12,570 per year.
- If you annualise these amounts, the Primary Threshold for the 2022/23 tax year is £11,908.
- Therefore, Employees’ NICs are 13.25% between £11,908 and £50,270, and 3.25% above £50,270.
If you’re working via an umbrella company or a PAYE basis with an agency, income tax and NICs will be deducted at source and paid to HMRC on your behalf.
If you’re working via your own limited company, you have more flexibility over your exposure to National Insurance. Most limited company contractors elect to pay themselves small salaries (either below, or just above the prevailing NIC ‘primary threshold’) in order to minimise their NIC liabilities. National Insurance Contributions are not payable on company dividends.
National Insurance for Employers
All employers must pay Class 1 NICs on the salaries they pay to their staff.
If you’re working via an umbrella scheme (or contracting directly with an agency), then your employer will allow for employers’ NICs at source from your gross fees.
If you are contracting via your own limited company, the company must pay employers’ NICs on any salary payments.
For the 2022/23 tax year, employers’ NICs apply to salaries above £9,100 at a rate of 15.05%.
No Employers’ NICs are payable if you draw an annual salary of £9,100 or less.
In April 2014, a new Employment Allowance was implemented, which reduces the Employers’ NICs paid by limited companies to their employers up to a maximum of £5,000 per year. This results in a saving to limited company owners who pay themselves a salary above the £9,100 Employers NIC threshold. The eligibility rules have been tightened several times in recent years.
Other Types of National Insurance
The ‘self-employed’ pay Class 2 and Class4 NICs. Class 2 liabilities are paid via self-assessment (the rate is currently £3.15/week on earnings of £6,725 or more per year).
Class 4 liabilities are worked out via the self-assessment process each year. The current Class 4 rate is 10.25% on annual profits of between £11,908* and £50,270 per year, and 3.25% on amounts above £50,270.
IT contractors rarely work on a ‘self-employed’ basis; the vast majority pay Class 1 contributions only as limited company or umbrella company employees.
* The Secondary Threshold is £9,880 from April 6th, 2022 to July 5th, 2022, and £12,570 from April 6th, onwards. £11,908 is the annualised amount for the 2022/23 tax year.
Further Information
Visit GOV.UK’s National Insurance section for in-depth guides, including the prevailing NI rates.
